February 15, 2008

Why Dani Rodrik should do more political economy

(DR note: Some time ago, I posted an entry called Why I don't do political economy any more where I said that I had lost interest in political economy because it presumes we know what the efficient policies are and because it leaves too little room for human agency. This is Jeff Frieden's attempt to dissuade me.)

It is certainly true that there is a fatalistic side to political economy. After all, a political economy analysis that correctly identifies the sources of existing policy also presumably shows how the policy is politically stable and hence unlikely to change unless exogenous conditions change. In other words, if all actors are optimizing, no amount of advice or encouragement from well-meaning scholars and advisers can improve the outcome.

In broad outlines, this is a convincing story. Indeed, it is one reason why I, personally, am ambivalent about getting involved in policymaking in any capacity (other than voting as a citizen). Politicians are, in my view, very good at figuring out the realm of the possible; if they haven’t struggled their way to a Pareto improvement, there may not be one available that is politically feasible. I confess to the personal view that the principal policy relevance of my job as a scholar has to do with helping inform the public about issues and options available to them, not with advising policymakers who already know most of what I would tell them. But that is just my own personal preference, not a principled belief – such as the one you express – that political economy implies powerlessness.

There are a number of reasons why the view you profess to hold is not the whole story, and why you should return to the political economy fold. Here are a few.

1. The irrelevance of unattainable alternatives. This one is easy, and you know it well. Simply put, if a first-best policy is not politically feasible, it is not first-best. The actual first-best policy is the best policy that is also politically feasible. Economics can help clarify the welfare ranking of policies (maybe); only political economy can clarify their political feasibility.

2. Multiple equilibria. Ever since Arrow, we have known that no political equilibrium can be stable; that is, any existing political coalition can be defeated by an alternative. Much of modern Political Science (and political economy) is devoted to figuring out how actual political systems stabilize political choices, typically by means of political institutions (what Ken Shepsle has called structure-induced equilibrium). The broader point is that in most instances, there is scope for a new political coalition to defeat the existing one, allowing society to move from one equilibrium to another (perhaps welfare-enhancing) one.

In American politics, for example, scholars and politicians alike are constantly on the lookout for “wedge issues,” policy issues that can break apart existing coalitions and create new ones. The Democrats focus on gun control, or Iraq, or Social Security, to try to win over Republicans who agree with them. The Republicans focus on prayer in the schools, or terrorism, or tax cuts, to win over Democrats who agree with them. This helps explain why politicians in developing countries long polarized – between Right and Left, or nationalists and internationalists, or on regional grounds – often try to bring new issues to the fore, such as corruption. Or, more nefariously, why politicians may latch on to ethnic differences that were previously politically unimportant to create a new set of feasible coalitions.

This means that political entrepreneurs are often open to the possibility of new feasible coalitions, especially if they are in opposition or if they are in countries in trouble. And political economy analyses can help clarify who the potential coalition partners may be, what issues can help unify them, and how their preferences can be met by new (one hopes, superior) policy packages.

In other words, political economy can provide valuable – and not otherwise available – ideas about the range of politically feasible options available to political entrepreneurs. Pure economics can only provide ideas about the range of economic options available, and perhaps try to rank them on some welfare grounds. For politicians, I submit, the former is highly relevant; the latter almost totally irrelevant.

3. Crucial parameters. While politicians may have a good handle on the feasibility of policy alternatives, and economists may be able to identify alternatives (and Pareto-rank them), this leaves a gap. Political economists focus, in many instances, on the sources of stasis or volatility in political agreements. One common observation, for example, is that politically attractive agreements are not reached because the actors’ commitments are not credible. Proposals to reform agriculture or labor markets may be rejected by farmers or workers because they do not believe that politicians, or alliance partners, will follow through on agreements to compensate those harmed by the reforms.

In fact, there is an old paper by Raquel Fernandez and some other guy, AER 1991, that argues that welfare-improving stabilizations may be delayed due to uncertainties about the distributional implications of the policies in question. Like commitment problems, incomplete information can make otherwise politically feasible policy outcomes hard to attain.

In these instances and more, serious political economy analyses can help clarify precisely where the obstacles to new policy initiatives may lie, and what the pitfalls of trying to pursue them may be. Policymakers may, in many circumstances, understand that they face opposition; scholars of political economy can help elucidate the underlying reasons for the opposition, and suggest whether and how those reasons might be addressed.

4. Dynamics. An observation that a particular policy is stable at a point in time is not necessarily an argument for it being stable under all circumstances. Indeed, the identification of sources of policy stability may point toward factors that could make it flexible. And this might suggest to policymakers a path forward. For example, to take a case that I am sure is uppermost in your mind, the Corn Laws would not have been repealed in Britain in the 1840s without the prior passage of the Reform Acts. Perhaps somewhat less arcanely, there is strong evidence that the probability of such policies as land reform and increased access to basic health care and primary education increases as the franchise is expanded. So a reform-minded politician might first aim at the expansion of the franchise – which people not otherwise inclined to the policy might support for other reasons – and then at the policy change.

In this context, political economists can provide some ideas about the interrelationships among political and policy realities. Political systems are complicated; relatively minor changes to legislative structure, bureaucratic delegation, electoral institutions, party alignments, and the like can have a significant impact. Few politicians think about these things – they focus on doing the best they can in the circumstances they face – but political economists do, in particular because most of their analyses involve variation among countries or over time.

5. Comparisons. As just mentioned, politicians typically only have their own societies in mind as they think about the realm of the possible. Scholars of political economy typically think cross-nationally, or about change over time. In this somewhat trivial sense, political economy analyses can suggest pathways that have worked in one country to policymakers in another. The general interest in Progresa or micro-finance are potential examples; at some level, new policies are a bit like new technologies, and it can take time for them to become known outside their country or region of origin.

In short, political economy is rarely so deterministic as you purport to think. Our professional incentives as scholars are to insist that there is only one feasible equilibrium, and that we have identified it. But what this really means is that we believe we have accurately identified the constraints on policy, and the direction in which they point, and the range of options to which they restrict policymakers. Just as I don’t know of any economists who believe that economic models are capable of completely and deterministically predicting all economic outcomes, I don’t know of any political economists who believe that our models can completely and deterministically predict all policy outcomes.

Political economy is a powerful tool for understanding policy. It is based on trying to clarify the constraints that political actors face as they interact in the political (and economic) arena. In fact, I think that it is only with the tools of political economy that we can understand why the world is as it is. And, as you know, the first step in trying to change the world is to understand it.

Comments

I which some political economist would write a book on how economic taboos are enforced in modern society. Unless we can say the name and the name can be heard taboos are being enforced.

I believe they are being enforced throughout society by those in power who want these names baned from television, buried in the back pages of newspapers and in the sparsely read books of some scholars. Even the Internet isn't much help. Taboo names get buried under the huge amount of me-to guided thinking.

The people on this blog know what factor-price equalization is. The man or woman on the street who have better things to do than read economic blogs never heard of it. Oh, she or he may be suffering its practical effects and gripping about having to compete with dollar a day workers, but that there is an economic concept for such an effect they know nothing of.

To say the name would give the concept standing. It would no longer be understood as the gripping of the disgruntled but the workings of an economic concept.

The powerful who benefit from free trade don't want what is seen as gripping to gain prestige. They don't want the concept talked about. The economic name must remain taboo so it is easier for them to maintain their power.

Politicians are unreliable because for them politics filled with petty interests comes before economics or welfare enhancing policies. All that matters to win an election are loyal supporters and populist agendas to draw votes from non-loyal ones (isn't this a shift of equilibria by deception?) So, the whole process, irrespective of Pareto optimal policies, is guided by interests rather than objective judgment. The theoritical realm and practical reality has a big wedge!

But, economic policy (apart from the overtheorietical models having no relvance, to which I am not a party to) studies analyze and prescribe policies that are as close to pareto optimality as possible. This goes public and ignorance is at the peril of politicians or policy makers. In fact, it relies less on erratic politicians (always in disequilibrium due to vested interest and greater-gain factors) and focuses on the policy makers and bureaucrats (who are not exactly politicians)! So, looking final impact-wise effect, economic policies based on ground realities have more effect than political economy policies.

So Dani, don't get swayed away! You are now in your true home, close to your heart!

Comparing social and economic conditions and structures in various developed countries one might found the importance of political economy in long-term reshaping of these structures. For example, take income inequality, availability of such social goods and services as education and medicine in Austria, France, the UK, the USA, etc. They are different to large extent. But economic results, as expressed as real GDP per capita is very close. So, political economist can and ougth to understand why the differences in many social and economic features do not produce the difference in real economic growth. This study is not from economics side, however, but from other social sciences.

More often we observe a different approach - study in favor of current state in given country. So to say, the research confirming superiority of given social and economic structure. In view of the differences between developed countries it is worthless. Those who continue just work in support of given economic policy with minor fluctuations.

Therefore, in both cases economists should not do any movements in the direction of political applications.

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I think this is a great post. One thing that I find the most helpful is number five. Sometimes when I write, I just let the flow of the words and information come out so much that I loose the purpose. It’s only after editing when I realize what I’ve done. There’s defiantly a lot of great tips here I’m going to try to be more aware of.

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